What to do when the U.S. Dollar Falls? Buy Foreign Stocks

By: Donald_W_Dony

As the U.S. dollar continues its downward plunge below $0.80, the question arises as to stock selection. Where are the best markets to invest in with a falling currency? The answer appears to be in Chart 1; Foreign stocks.

In the top portion of Chart 1, is the foreign stock index EAFE (symbol EFA) divided by the S&P 500. The lower portion of the chart is the U.S. dollar index. When the line in the top portion of the chart rises, it indicates that the EAFE index has greater performance than the S&P 500. Alternatively, when the line falls, as in the 2nd quarter of 2005, the S&P 500 has higher relative performance. The evidence indicates that when the U.S. dollar increases in value, there is higher performance from the S&P 500. However, as the currency has been declining over the past four years, the EAFE has increased and out performed the S&P 500.

A declining U.S. dollar results in higher foreign currency values. Global investment funds tend to flow toward countries with the stronger currencies. Stronger currencies also reflect superior economic conditions in a particular country. Bonds too have higher appeal, for global investors, in nations with rising currencies.

Bottom line: The falling U.S. dollar shows a strong correlation to higher performance in foreign stocks. And as the future prospects for the American currency appears bleak, portfolios should be overweighted to foreign equities and under weighted in U.S. securities and bonds.

Your comments are always welcomed

By Donald W. Dony, FCSI, MFTA
www.technicalspeculator.com

COPYRIGHT © 2007 Donald W. Dony
Donald W. Dony, FCSI, MFTA has been in the investment profession for over 20 years, first as a stock broker in the mid 1980's and then as the principal of D. W. Dony and Associates Inc., a financial consulting firm to present.  He is the editor and publisher of the Technical Speculator, a monthly international investment newsletter, which specializes in major world equity markets, currencies, bonds and interest rates as well as the precious metals markets.   

Donald is also an instructor for the Canadian Securities Institute (CSI). He is often called upon to design technical analysis training programs and to provide teaching to industry professionals on technical analysis at many of Canada's leading brokerage firms.  He is a respected specialist in the area of intermarket and cycle analysis and a frequent speaker at investment conferences.

Mr. Dony is a member of the Canadian Society of Technical Analysts (CSTA) and the International Federation of Technical Analysts (IFTA).

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